“Never underestimate the capacity of another human being to have the same shortcomings you have.” — Leigh Steinberg

mycuppa July 2017 Newsletter

Jeffy has a new toy, and it's a blast.

 

Despite his lovely wife's protests, Jeffy bought yet another roaster; this baby is an advanced lab/small production system.

 

Our platform enables us to push the boundaries of what is possible (or practical and realistic) in filter roasts, allowing us to extend our R&D efforts further.

 

Additionally, this platform is helpful during unexpected sales surges on a specific coffee by providing us with the means to perform emergency roasts in the afternoon.

 

 

 

The "UGLY" truth - why parcels are taking longer to arrive

 

In the weeks leading up to the drafting of our monthly Newsletter, I often reflect upon many of the challenges we face each day and think about how we can do a bunch of stuff much better.

 

You may be surprised to discover that what occupies my brain has little to do with how to roast better coffee, or sourcing improved raw coffee grades, packaging, marketing or a myriad of other innovations - Here are my thoughts on how to improve the overall customer experience during one crucial phase.

 

All too often, this deep analysis ends in the black hole that is Logistics.

 

Each month, I have to think carefully about whether to feature yet another rant about the declining state of logistics in Australia - sometimes taking a moment and backing off from a frustrated mindset as we don't want each month to be filled with bad stories about doom & gloom freight.

 

Mostly, it's about a bunch of ideas, concepts and grander visions for how we can make a step change in getting our crafted products to customers faster and cheaper.

 

It's tough for us to combat the rising tide of anger from a sub-standard shipping service.

 

I'm guilty of barking back as frustration levels run high - but it's because we are up at 4 am each day busting our butts to create a quality fresh food product that our customers need today, not next week.

 

Our service executes everything within our control quickly; however, shipping often results in a poor experience and outcomes.

 

Frustration stems from being powerless to fix endemic issues outside our domain - yes, we complain and get upset. Still, we must continue to press for change.

 

There has long been a significant disconnect between general expectations and reality for online retail in Australia.

 

These are why savvy Australian retailers, particularly those entrenched in "bricks and mortar", keep their online offerings as a lower priority "plaything".

 

They know logistics is an Achilles heel for Australian online retailers.

 

We get on with it by fighting back by offering better quality, price and far superior control over product freshness.

 

Ultimately, these are the key drivers of purchase decisions for serious coffee enthusiasts.

 

The disconnect is from a culture generated by US-based retailers (eBay, Amazon, etc) forcing their identical US business policies of "fast and free" upon our local domestic market - practices that are way out of step with the physical realities of a country struggling with an expensive, slow and congested residential shipping provider monopoly.

 

After spending eight years optimizing our processes to hit zero response times, we know it only too well.

 

Yet, that does not save us from the indignity of a poor freight experience.

 

There is also the powder-keg issue of unfair tariffs between the low rates international shippers enjoy from AusPost for the final-leg domestic delivery and the exorbitant rates charged to hard-working Australian merchants.

 

It's not a level playing field, but that's a story for another day.

 

Back on topic - speed.

 

Every single regular parcel (Express are handled differently) must pass through a central state Parcel Hub.

 

This hub and spoke topology is the same for any freight provider, whether it's Australia Post or a business freight provider like TNT, etc - they all use the same techniques of edge distribution and line haul.

 

In the case of Australia Post, the three major hubs on the Eastern seaboard are Sunshine VIC, Chullora NSW and Underwood QLD.

 

You may have also noticed when studying the tracking events that parcels tend to sit and wait for what seems to be rather unusual periods in these hubs.

 

Each parcel must pass through an x-ray to measure dimensions (cubic volume) and weight. It's astounding that given the sheer volume of parcels moving throughout the Australia Post parcel network, they have only a single Xray system in operation (NSW and VIC are being ramped up with additional units to add capacity before the peak freight season starting in September... a project living on a 12-month promise).

 

Despite the speed of these systems, it's a massive choke point on the entire parcel network when you consider there may be more than 900,000 parcels in circulation on a given day around Australia.

 

With many of those in Sydney and Melbourne, Chullora and Sunshine become critical congestion areas, with parcels potentially sitting for more than a day in queues measured into the hundreds of thousands.

 

It's not just a mycuppa thing; every merchant is affected equally, as it's just wall-to-wall cages full of random parcels.

 

Surprisingly, it's not entirely the fault of the x-ray systems for delays.

 

It's an "ugly freight" issue - unusual, awkward-shaped items. Think tyres, poles, cylinders, car batteries, and stuff that is not the traditional shape of a box or carton, causing the automated mechanical systems in the parcel hubs to require human intervention, dramatically slowing the processing speed.

 

It's also contributing to higher damage levels and increasing incidents whereby the consignment labels are being sheered off cartons, rendering the parcel undeliverable.

 

The explosive growth of online retail means that just about anything is being passed through the freight network these days, and well, you can see what's going to happen: a tangled mess!

 

Our MyCuppa freight is ideal for parcel hubs since we pack everything in suitably sized boxes for which the x-ray systems were designed.

 

However, all the cargo is mixed into cages and mechanically tipped and routed, creating a random and tangled mess.

 

Think airport security when you are trying to enter the departure lounges by passing a bag of golf clubs sideways through those narrow Xray machines - it stops everything and everyone immediately.

 

Ugly freight is the primary reason the parcel networks are slowing down and lagging capacity from explosive parcel growth.

 

It's a 12+ month plan for upgrades, and by the time it starts delivering benefits, the residual growth has overtaken the extra capacity, and they are yet again on the back foot, unable to cope with overloaded volumes.

 

There is no surcharge on unusual-shaped items within Australia Post as the standard cubic volume formulas apply.

 

Although AusPost is looking into this challenging aspect of their service and trying to think of ways to speed up regular freight, it's only early days yet.

 

They may be unprepared to introduce such measures as extra charges for unusable-shaped items for fear of outrage from merchants.

 

I wish they would charge more for awkward freight because it's another simple case of the tiny minority affecting the more significant majority.

 

A few months ago, TNT introduced a hefty manual handling surcharge applicable to items that require more physical attention by handlers.

 

So where does that leave us sitting as road kill?

 

We will only sit on our hands and do something; yet again, we plan to explore alternatives and trial whether they are up to the task for our freight as we seek less congested channels to ensure our customers' parcels travel fast.

 

 

Has Australia reached a capacity tipping point for roasted coffee?

 

Not only has there been an explosion of new coffee brands in the last seven years (up from 350 to well over 1200 and counting), but the consequence of all this extra capacity is applying some fascinating pressures upon the roasted coffee market.

 

We see unhealthy signs from the significant gap between excess supply and a slower-rising demand. It's not affecting us as we continue to grow, month on month.

 

Still, colleagues in the industry I talk with lament the harsh prevailing conditions and the literal "drive-by" damage from stealing customers.

 

It's rare to come across coffee companies up for sale, unlike the thousands of cafes that are usually on the market officially or unofficially at any given time.

 

Most cafe owners would be willing to sell their business without hesitation.

 

At the same time, some are even desperate to exit, but it's rare to see coffee companies changing hands.

 

In the suburb where we live, more than 60% of the cafes, some of them only a few years old, are up for sale - quite a few of them being on the market for over 12 months.

 

Cases are trading hands more frequently than stocks in most people's long-term share portfolios.

 

I wondered why this continuing fragmentation, or a lack of unified structure in our local Australian coffee industry, prevails.

 

Is it just because there is zero consolidation taking place?

 

The coffee industry in Australia has been relatively immune from any significant structural change - which puts it in a pretty unique category.

 

Look at almost every other sector; consolidation will always be at play.

 

The handful of acquisitions or investments over the last five years have involved relatively large players such as Coffex (Malaysian interests), Toby's Estate (Moccopan), Veneziano (The Coffee Club) and Di Bella (Retail Food Group). Whilst pretty large kilos, this accounts for a handful of brands versus the other 1000+.

 

In the US, there is a greater activity level of market transactions for coffee companies due to more accessible access to debt capital and a larger market size helping de-risk any deal transactions.

 

The small to medium sector of the market (known as the dangerous middle in any industry) remains a fierce battleground, fighting to hold onto existing customers and launching brazen or desperate attempts to steal new customers from competitors.

 

This market segment includes the new micro-roasters and established companies that need a distinct point of difference, a.k.a. the me-too brigade.

 

There is also an element of untested valuation principles applied to coffee roasting companies in Australia when they eventually test the market with a sale.

 

Most, if not all, are founders or family, and this brings that emotional element from building up something into a viable enterprise - all those years of toil and millions of $ dollars invested.

 

Goodwill and customer stickiness become very intangible factors in any enterprise valuation calculation.

 

Eventually, though, metrics will emerge, but it will take a few sales to get a handle on what is fair and reasonable regarding peer market indices.

 

You see, the number of new coffee drinkers increases at a different rate than capacity is added.

 

Yes, our population is growing relatively fast from a more extensive base. Still, it only sometimes translates into linear conversion of coffee drinkers.

 

Surprisingly, the lowest consumers of coffee are the age group from 18 to 29 years old.

 

That means the influential demographic, the social-media-addicted young adults, those with abundant energy, the most opinionated and vocal we try so hard to win, are less likely or interested in coffee.

 

One age segment is a total shock as to the high percentage of coffee drinkers, the 14 - 17 year olds.

 

Yes, I had to look back at that surprising statistic a few times.

 

As we regularly talk with roasting equipment suppliers, they claim no end of new systems and upgrades in the pipeline for Australian Coffee Companies.

 

Some Coffee Companies are increasing their total capacity by more than 400% in the hope that orders of roasted coffee will flow shortly.

 

We are also eyeing upgrade options as we march to a faster drum. Still, we will manage it over time as the change program is significant.

 

Today, growth plans for many of the mid-sized coffee companies are primarily centred around a gradual, organic, incremental rise - missing from these plans are mergers and acquisitions, as there is always caution in the market that shows no sign of maturity.

 

These simplistic strategies rely upon competitors stumbling, pinching customers, or needing a new opportunity to land in their lap unexpectedly.

 

Innovative thinking companies will join forces to bring scale economies or synergies when the tipping points occur.

 

Therefore, these companies are at an advantage to compete in the market.

 

However, until then, the cost structures will keep rising due to the increasing cost of labour, real estate, and energy, which are growing faster than the retail price of roasted coffee.

 

This will continue to put pressure on profit margins.